Elements of Cost-

Labour
• The cost of labour is the amount of all salaries paid to the
workers, as well as the employee benefits and payroll taxes
charged by an employer.
• Labour is an essential factor of production. It is a human
resource and participates in the process of production. Labour
cost is a significant element of cost of a product or service.
For costing proposes, labour may be
classified into two broad categories –
DIRECT LABOUR
Direct labour is that labour which can be readily identified with a
specific job, contract or work order. It includes:
All labour directly engaged in converting raw materials into finished
goods or in altering the construction, composition or condition of the
product.
Any other form of labour which is incurred wholly or specifically for any
particular job, contract or work order.
Some examples of direct labour are:
• Weaver in weaving unit
• Carpenter in furniture unit
• Tailor in Ready-made wears unit
• Baker in Baking unit
• Halwai in confectionery unit
• Washer in Dry cleaning unit
• Labour employed on construction unit.
INDIRECT LABOUR
Indirect labour is that labour which cannot be readily identified
with a specific job, contract or work-order. It includes all labour
not directly engaged in converting raw-materials into finished
goods or in altering the construction, composition or condition
of the product.
Some examples of indirect labour are:
• Labour employed in Personnel Department
• Labour employed in Engineering & Work Study Department
• Labour employed in Time-keeping Department
• Labour employed in Pay-roll Department
• Labour employed in Cost Accounting Department.
Direct & Indirect Cost of
Labour-Example
• If a glass manufacturing company is planning the sales price
for glass doors, the direct labour costs are those expenses that
can be directly attributed to production. The company pays
workers to run machinery that cuts glass into specific pieces
for door assembly, and those expenses are direct costs.

• On the other hand, the company has several employees who

provide security for the factory and warehouse. Those labour
costs are indirect because the cost cannot be attributed to a
specific act of production.
 Remuneration
Calculation

Time rate Piece rate

wage system wage system

Differential
Straight Piece
piece rate
rate system
system

Taylor Merrick
Differential differential
rate system rate system
METHODS OF WAGE
PAYMENTS
• Time Rate Wage System,
• Piece Rate Wage System.
TIME RATE WAGE SYSTEM
• A worker is paid a fixed rate per hour or per day or per month
for the time devoted him.
• Wages = Actual time devoted x Time rate
• Mr X, a worker, gets Rs. 10 per hour. If he works for 8 hours
• He will get Rs 80 (i.e., 8 x Rs 10)
PIECE RATE WAGE SYSTEM
• A worker is paid at affixed rate per unit produced or job
completed.
• Wages = Number of units produced x piece rate per unit
• Mr Y, a worker gets Rs 5 per piece. If he produces 20 pieces
• He will get Rs 100 (i.e., 20 x Rs 5).
INCENTIVE SYSTEM
• Incentive may be defined as “the stimulation of effort and
effectiveness by offering monetary inducement or enhanced
facilities”. It may be monetary or non-monetary
• TYPES OF INCENTIVE SYSTEM
• TAYLOR’S DIFFERENTIAL PIECE RATE
• MERRICK’S DIFFERENTIAL PIECE RATE
TAYLOR’S DIFFERENTIAL
PIECE RATE SYSTEM
• Standard time is fixed for each work.
• Two pieces rates are fixed- (i) a lower rate (i.e., 83% of normal
piece rate) for the worker who produces below the standard
output,
• (ii) a higher rate (i.e., 120% of normal piece rates) for the
worker who produces standard output or more than the
standard output.
• Note: Some authors also use 83% and 125% of the normal
piece rates as lower and higher rates respectively.
Worker Total Earnings

For worker who produces = Actual output x

less than the standard Normal piece Rate x
output 83%

For worker who = Actual output x

produces standard Normal piece Rate x
output or more than 120%
the standard output
Question:
• Standard output 100 units, Normal piece Rate Re 1 per piece,
X produced 60 units, Y produced 100 units, Z produced 110
units. Earnings using Taylor’s differential piece rate will be?
Solution
• X’s earning = 60 units x Re 1 x 83% = Rs 49.8
• Y’s earning = 100 units x Re 1 x 120% = Rs 120
• Z’s earning = 110 units x Re 1 x 120% = Rs 132
MERRICK’S DIFFERENTIAL
PIECE RATE
The main features of Merrick’s Differential Piece Rate are as follows:
Standard time is fixed for each work.
Three piece rates are fixed as follows:
Efficiency attained Piece Rate

Upto 83 1/3 % 100% of Ordinary

Piece Rate
Above 83 1/3% and 110% of Ordinary
upto 100% Piece Rate
Above 100% 120% of Ordinary
Piece Rate
Problem
• Standard output 100 units, Normal piece Rate Re 1 per piece,
X produced 60 units, Y produced 100 units, Z produced 110
units. Earnings using Merrick’s Differential Piece rate will be as
follows:
Solution:
• X’s earnings = 60 units x Re 1 = Rs 60
• Y’s earnings = 100 units x Re 1 x 110% = Rs 110
• Z’s earnings = 110 units x Re 1 x 120% = Rs 132
Practice:
• Standard output per hour is 5 units. Actual output in a 40 hour
week is 220 units. Wage rate per hour is Rs. 10 per hour.
Calculate total earnings under-:
• Straight time rate
• Straight piece rate
• Taylor’s differential piece rate
• Merrick’s differential piece rate
Labour Turnover
• Labour turnover is defined as the proportion of a firm's
workforce that leaves during the course of a year.
OR
• Labour turnover (or “staff turnover” as it is sometimes called)
is all about employee retention - i.e. the ability of a business
to convince its employees to remain with the business. 
Causes of labor turnover
• Avoidable Causes
• Low wages, Unhappy relations with co-workers or supervisors,
Unsatisfactory working conditions, Trade union rivalry, Lack of
medical facilities, transport facilities, No retirement benefits
• Unavoidable Causes
• Death or retirement, Illness or accident, Change in plant
location, Marriage, Discharge on disciplinary grounds,
personal dislike for job or environment.
Methods of Measurement
of Labour Turnover:
• (i) Labour Turnover under Separation Method: The basis of
calculating labour turnover under this method is the number
of employees discharged during a period.
(ii) Labour Turnover under
Replacement Method:
• The number of employees recruited during a period is taken as
basis for calculating labour turnover.
(iii) Labour Turnover
under Flux Method:
• This method takes into account the number of employees who
left the organization and those recruited by the organization
during a period.
Question:
• No. of workers: At the beginning of the month-500, At the end
of the month-600.
• During the month, 5 workers left, 20 persons were discharged
and 75 workers were recruited. Of these, 10 workers were
recruited in the vacancies of those leaving, while the rest were
engaged for an expansion scheme
• Calculate labour turnover from all three methods.
Solution:
• Average workers= (500+600)/2= 550
• Separation method= (5+20)/550= 4.54%
• Replacement method= 10/550= 1.82%
• Flux method= (25+75)/550=18.18%
Idle Time:
• When workers spent their whole time at different jobs, then
the time booked for jobs must with the gate time.
• Ordinarily the time booked for jobs does not agree with the
gate time.
• It so happens, because of reasons like, waiting for materials,
machine breakdown, waiting for instruction, power failure etc.
• Reconciliation of gate time with time booked is facilitated by
preparing an idle time card.
Causes of Idle Time:
• (i) Power failure
• (ii) Waiting for work
• (iii) Waiting for instruction
• (iv) Waiting for tools
• (v) Machine breakdown
• (vi) Bad Planning of work
• (vii) Accidents, strikes etc.
• (viii) Time wasted in changing from one job to another
• (ix) Season nature of industry
• (x) Time taken to reach the department, from gate
Overtime:
• When a worker works above his normal working hours, he is
said to be working overtime. And according to Factories Act,
1948, overtime has to be paid at double the normal rate. If a
worker works more than 9 hours on any day or 48 hours is a
week, the worker is entitled for overtime payment.
• A work is asked to do overtime, when he finishes his normal
hours. The extra amount payable to a worker over and above
the normal rate is an overtime premium. The factories Act says
that a worker is to be paid twice his ordinary rate.